Before the deregulation bonanza of the 1980s, corporations were expected to use debt and the public markets as the capital of last resort: they would pay "normal" dividends, then use the left over money to increase pay and fund expansion; but after the birth of "shareholder management," companies have acted like homeowners before the financial crisis: borrowing heavily to pay investors, at the expense of expansion and wages — but unlike homeowners, corporate management gets to duck the bill when it comes due.
JW Mason's longread about the rise of massive corporate payouts to investors — with executive compensation redesigned to reward execs who go along with it — builds on the existing literature on the hollowing out of American business, tying in neatly with Thomas Piketty's carefully documented observations about the role of Reagan-era deregulation in the creation of today's massive and growing wealth-divide.
This is really the story of peace after the hostile takeover era, with management and financiers making peace and finding ways to loot their businesses together, without the messiness of courtroom battles and proxy-fights. Now, every penny a business spends to invest in future lines of work has to be irrefutably risk-free and high-return, because otherwise the investors will howl for blood and demand that those pennies be diverted to dividends and stock buy-backs. So Steve Jobs had to face down "activist investors" who didn't want an "iPad or iSlate or iTablet" — they wanted an "iGetsomemoneyback." It's why Disney is in internal panic mode after massive (but unexceptional) cost overruns for Shanghai Disneyland, to the extent of cutting staff hours at other parks even as they saw record crowds.
The implication of this is important: it tells you that giving companies more money (by making lending cheaper or by reducing taxes) will not cause them to invest more: instead, it will just increase the money given to investors.
For example: In the period from 2002 to 2008, net corporate borrowing rose from 1 percent to 6 percent of GDP. But unlike in earlier episodes of rising corporate borrowing, payouts rose point for point with borrowing. By the end of the boom, corporations were paying out more than 100 percent of their cash flow to shareholders. So on net, corporations raised no net funds from financial markets. The money that flowed in the front door as new borrowing flowed right out the back as higher dividends and share repurchases.
It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancing to pay for extra consumption. What nobody mentioned was that the rentier class had been playing a similar game longer and on a much larger scale. At the top of every boom in the neoliberal era, there's been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It's a bit like the homeowners "using their houses as ATMs" during the 2000s, except that the shareholders don't get stuck with the mortgage payments. The businesses' workers and customers get to share the pain.
Disgorge the Cash
[JW Mason/The New Inquiry]
(via Naked Capitalism)